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    First Advantage Corp (FA)

    Q4 2023 Summary

    Published Jan 13, 2025, 7:32 PM UTC
    Initial Price$13.70October 1, 2023
    Final Price$16.57December 31, 2023
    Price Change$2.87
    % Change+20.95%

    What went well

    • First Advantage expects to achieve significant cost synergies of at least $50 million run rate within 18 to 24 months from the acquisition of Sterling, driven by reductions in third-party costs through integrating FA's proprietary Verified database and AI-driven SmartHub technology, as well as other immediate cost savings such as consolidating audits, tax returns, and insurance programs.
    • The acquisition enhances product and vertical diversification, particularly strengthening First Advantage's presence in the high-growth health care vertical, where Sterling has a strong foothold (23% of their revenue), complementing FA's verticals and potentially leading to new growth opportunities without the need for pruning.
    • The combined company generates substantial cash flow (about $300 million of cash flow from operations), which management plans to use to delever the balance sheet quickly post-acquisition, aiming to reduce net leverage from around 4x towards their target range of 2x to 3x, enhancing financial stability.

    What went wrong

    • First Advantage may face regulatory risks related to its planned acquisition of Sterling, as combining two of the top three companies in the industry could attract scrutiny from the Department of Justice (DOJ) regarding antitrust issues, potentially delaying or jeopardizing the deal.
    • The company's leverage is expected to increase significantly due to the acquisition, with estimates reaching around 4.5x, raising concerns about higher debt levels and financial risk.
    • First Advantage reported a larger-than-expected 13% decline in base growth in Q4 2023 and projects negative base growth of about 5% for 2024, indicating continued weakness in hiring trends and potential revenue challenges.

    Q&A Summary

    1. DOJ Considerations
      Q: Are there antitrust concerns with this merger?
      A: Management believes the $13 billion market is highly fragmented with many competitors of all sizes, so they are confident about the merger proceeding but will let their experts guide them through the DOJ process.

    2. Cost Synergies
      Q: Is the $50 million synergy target all cost synergies?
      A: The $50 million target, achievable in 18 to 24 months, is from cost synergies, with potential upside from revenue synergies through cross-selling opportunities. Some savings are low-hanging fruit like eliminating duplicate audits and consolidating insurance programs.

    3. Leverage and Deleveraging
      Q: How quickly can you reduce leverage after the transaction?
      A: Post-closing, the primary objectives are integration and deleveraging. With about $300 million in combined cash flow from operations, the company plans to deleverage quickly. Timing of the deal closure and cash on the balance sheet will further reduce net leverage.

    4. Base Growth Outlook
      Q: What's the assumption for base growth in 2024?
      A: Consolidated base growth was down 13% in Q4, more than anticipated. For 2024, they project base to be down over 5% for the full year, with a 9% to 13% decline in Q1 and sequential improvement thereafter.

    5. Pricing Trends
      Q: Are pricing trends improving with increased scale?
      A: Pricing remains consistent and stable in the industry. They have not discussed pricing with Sterling and will not until after the merger closes.

    6. Customer Retention Post-Merger
      Q: How will you minimize client losses after the merger?
      A: A dedicated integration team will focus on minimizing client loss by taking a conservative approach to technology integration, avoiding forcing customers onto unwanted platforms, and prioritizing strong customer relationships.

    7. Competitive Benefits
      Q: How will the merger enhance competitive positioning?
      A: Combining strengths from both companies offers customer benefits by leveraging complementary verticals and best-in-breed products, though detailed plans are still being developed.

    8. Vertical Hiring Trends
      Q: Which verticals show strong or weak hiring?
      A: Transportation and home delivery remain strong; retail and e-commerce are flat but stable; staffing and financial services continue to be down; health care is performing well, especially in recent quarters.

    9. International Stabilization
      Q: Are you seeing stabilization in APAC and India?
      A: Starting in Q4 2023, there are signs of stabilization and slight improvement in APAC and India after being a drag on the business, though it's early to call it a trend.

    10. AI Investments
      Q: What are your plans for AI investments post-merger?
      A: They are investing in AI to improve candidate and customer experience and reduce costs, including a $3 million initiative in U.S. criminal data and existing AI chatbot implementations that have reduced headcount and improved satisfaction scores.

    11. High-Growth Verticals Strategy
      Q: How will the merger affect focus on high-growth verticals?
      A: The combined company will continue focusing on high-volume hiring in key verticals like transportation, retail, and health care. Both companies have complementary strengths without a need to prune businesses, enhancing their high-growth areas.

    12. Third-Party Cost Reduction
      Q: Can you clarify reductions in third-party costs?
      A: Utilizing the company's Verified database and AI-driven SmartHub technology can reduce third-party data costs once integrated with Sterling, leading to cost savings.

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